SFC takes legal action against CITIC, former top officials

Hong Kong’s markets watchdog has initiated legal action against CITIC Ltd. (00267.HK) and its former top officials, seeking compensation for investors who suffered losses due to the firm’s misconduct in 2008 in relation to some foreign exchange bets.

The Securities and Futures Commission (SFC) instituted proceedings Thursday, the last retroactive day in six years for a civil suit, in both the Court of First Instance and the Market Misconduct Tribunal (MMT), the Hong Kong Economic Journal reported.

The SFC is seeking orders from the court to make CITIC, formerly known as CITIC Pacific Ltd., offer restoration or compensation for up to 4,500 investors who purchased the company’s shares between Sept. 12 and Oct. 21, 2008.

The SFC pointed out that CITIC issued a circular on Sept. 12, 2008 that contained false or misleading information about the company’s financial position.

The circular stated that “the directors are not aware of any adverse material change in the financial or trading position of the group since Dec. 31, 2007.”

However, in a later statement on Oct. 20, 2008, CITIC disclosed that it suffered massive realized and mark-to-market losses on some leveraged foreign exchange contracts which CITIC had entered into to manage currency risk of its Australian iron ore mining project exposure.

The profit-warning revealed that CITIC had become aware of the exposure arising from those contracts on Sept. 7, 2008, which meant the circular published a few days afterward contained false or misleading statement.

CITIC shares, which were suspended from trading on Oct. 20, 2008 for the issuance of the earnings warning, tumbled 55 percent from HK$14.52 to close at HK$6.52 on Oct. 21, 2008 when trading resumed.

The SFC’s legal action comes five years after an investigation was completed, and marks the first of its kind the watchdog has taken against blue-chip companies. If the court proceedings are successful, it could lead to a compensation payout of up to HK$1.9 billion (US$245 million).

Five of the company’s former top officials, namely then chairman Larry Yung Chi-kin, managing director Henry Fan Hung-ling, deputy managing directors Leslie Chang Li Hsien and Peter Lee Chung-hing, and executive director Chau Chi-yin, are also targeted for a sanction in the proceeding with the tribunal.

The investigation was actually completed a year after the incident. Yet the watchdog didn’t take further action until now as a probe by the police’s Commercial Crime Bureau was underway.

The SFC is acting in accordance with the authority given under Section 213 of the Securities and Futures Ordinance to seek injunctions and other orders to compensate the 4,500 investors.

Meanwhile, it is also seeking through the tribunal sanctions on the above-mentioned five former directors, potentially in the forms of fines, prohibition from a director role and investing in foreign exchange in Hong Kong for up to five years.

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